Milk pricing is the most important signalling mechanism available to dairy farmers, yet the price paid for milk does not reflect the amount and value of products that can be made from it.
The Northern Ireland pricing structure does not fully differentiate between high and low quality milk. It has been calculated that many producers with high solids content on average get less per kilogram of solids than those producing a more watery product, in fact some might say there is a focus on volume in Northern Ireland.
Cows’ milk consists of c.87.5 percent water and c.12.5 percent dry substance (including components such as butter fat and protein).
The key is attaching value to the dry substance which is suspended or dissolved in the water. In our example we will consider butter fat. When the base price of milk rises and remains high, volumes inevitably increase, where farmers are chasing litres rather than butter fat, when no incentive exists. Instead, the increased volume of milk will need to be processed, leading to downward pressure on price in the event of any imbalance of supply and demand.
A processor needs to send the right price signals to the primary producer. Consider the GB processor Barbers, who last month announced an increase in their butter fat payment, effectively providing their farmers with a clear market signal via this incentive.
Milk with a low compositional quality costs more to process. The yield per litre of milk processed increases with higher constitutional quality and it costs less per tonne to manufacture than to transport, leading to gains for both producer and processor.
The challenge is how to evolve a payment system where a farmer is paid for milk quality.
Constituent Pricing is the pricing of milk on the basis of component quality. Higher compositional quality of milk provides the potential to produce more tonnes of dairy products from current factory capacity. Analysis has indicated that Constituent Pricing will increase the value of the milk pool over time to benefit all dairy farmers. As well as ensuring sustainability at farm level, Constituent Pricing would allow accurate control of unit costs of milk per kilogram of the final product. Another dual “win-win.”
There are barriers which need to be overcome, with no instant fix and this could take years to implement. Challenges exist in terms of estimating component values, with varying calculations according to the NI product mix. However, the biggest challenge would be how to ensure a synchronised move when the time is right amongst key decision makers.
Resolution to these barriers and challenges means that we could see dairy farmers paid on constituents rather than volume, adding value to the milk pool, meaning an improved milk cheque and leading to a more competitive dairy industry. We need to build upon the growing impetus on the ground and expand the debate and discussion. Producers should be allowed the opportunity to see what Constituent Pricing could mean for them.
In the coming weeks, the UFU will be meeting industry experts to look into addressing these barriers, and widen the debate and look at every option. But what is clear, is that now is the time for Northern Ireland dairy farmers to consider all pricing options to ensure we have a sustainable and competitive industry to tackle the challenges ahead.
Dairy consultant, Ronald Akkerman recently said that UK dairy farmers have never received the market value of the milk solids produced and urged that “dairy farmers should take charge of their own destiny”.